Additional Estate Planning Tools

You may also need to use additional estate planning tools depending on the size and complexity of your estate. These tools may be useful for reducing potential estate taxes, but they can also serve other purposes.

Trusts
Trusts are legal vehicles for managing assets solely for the benefit of the trust beneficiary, and are typically less vulnerable to legal challenges than wills. Of the over 50 trusts available, not all can or should be used to save estate taxes. The popular living trust, for example, does not reduce estate taxes. Other purposes that trusts can serve include:

• Managing money for an heir who is too young or financially incompetent
• Providing continuity of management in the event of incapacity
• Requiring an heir to meet certain standards, such as being drug free or graduating from college, in order to inherit money
• Ensuring that a person's assets go to their children rather than the surviving spouse's children from a previous marriage
• Financially assisting a disabled child without disqualifying the child for government assistance
• Reducing income taxes and providing income for the donor while leaving more benefits for the charity
• Protecting assets from creditors
• Reducing the cost and public exposure of probate
• Controlling the inheritance for a troublesome heir instead of simply disinheriting the person.
• Disinheritance often provokes ill feelings not only toward the estate owner but also toward those who actually inherit.

Ownership of assets
Who owns what assets in a family can have a significant impact on an estate plan. For example, most couples own property jointly, "with rights of survivorship." Upon the death of one spouse, the jointly owned property automatically passes directly to the surviving spouse, avoiding probate.

While this is an appropriate choice for many couples, it's not the best choice in all situations.

Insurance
Insurance can serve several purposes in estate planning:

• Provide family protection in the event of premature death
• Protect your estate's assets from catastrophic loss or lawsuits
• Can be an asset passed on to heirs or charities
• May be used to pay for estate taxes
• A small business owner may use life insurance to provide an equitable share to heirs who won't run the business
• Co-owners in a small business often use life insurance to buy out the deceased's estate

The ownership of life insurance bears careful scruntiny for estate planning. Estate owners often mistakenly own large amounts of life insurance to help pay for estate taxes. While the death benefits are not subject to income tax, they may be subject to estate tax. Consequently, the insurance benefits earmarked to pay estate taxes on other property end up themselves being taxed. One strategy around this is to use the irrevocable life insurance trust, in which the estate owner is the insured but the policy is actually owned by the trust and thus generally no included in the insured's estate.

Less expensive strategies
If estate taxes are an issue, keep in mind less expensive tax strategies such as gifting. For example, you can give away $12,000 (indexed for inflation) every year to each person you choose, free of gift tax. A couple could give a grandchild $24,000 a year, for example. You also can pay the tuition bill or a medical bill for a favorite grandchild or niece free of gift tax, as long as you pay it directly to the institution.